How Sales Tax Works: A State-by-State Guide

Sales tax is something most Americans deal with every day, yet few fully understand how it works. Unlike income tax — which is calculated once a year — sales tax affects nearly every purchase you make. The rates vary dramatically from state to state and even city to city, and the rules about what’s taxable can be surprisingly complex.

Here’s everything you need to know about how sales tax works in the United States.

The Basics: What Is Sales Tax?

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and, in many cases, services. The seller collects the tax at the point of sale and remits it to the government.

Unlike a value-added tax (VAT) used in many other countries, U.S. sales tax is only applied at the final point of sale to the consumer. Businesses generally don’t pay sales tax on goods purchased for resale.

State Sales Tax vs. Local Sales Tax

Sales tax in the U.S. has two potential components:

State Sales Tax

This is the base rate set by the state government. It applies uniformly across the entire state. State sales tax rates range from 0% (in states with no sales tax) to 7.25% (California).

Local Sales Tax

Counties, cities, and special districts can add their own sales tax on top of the state rate. This is where things get complicated. The same state can have wildly different combined rates depending on where you shop.

For example, in Texas (6.25% state rate), shopping in Houston might mean an 8.25% combined rate, while a rural area might only charge the base 6.25%.

States With No Sales Tax

Five states have no state-level sales tax at all:

1. Alaska — No state sales tax, but some local municipalities charge up to 7.5%
2. Delaware — No state or local sales tax
3. Montana — No state sales tax, but some resort communities charge a local tax
4. New Hampshire — No state or local sales tax (but has a meals and rooms tax of 8.5%)
5. Oregon — No state or local sales tax

These states rely more heavily on income taxes, property taxes, or other revenue sources to fund government services. Delaware and New Hampshire, for instance, have relatively high property taxes. See our guide on states with no income tax for a full breakdown.

States With the Highest Combined Sales Tax Rates

When you combine state and average local rates, these states consistently have the highest overall sales tax burden. For a complete listing of every state’s current rates, see our sales tax by state guide for 2026.

• Tennessee: 9.548% average combined rate (7% state + local)
• Louisiana: 9.550% average combined rate (4.45% state + local)
• Arkansas: 9.44% average combined rate (6.5% state + local)
• Washington: 9.29% average combined rate (6.5% state + local)
• Alabama: 9.29% average combined rate (4% state + local)

It’s worth noting that states with lower state rates but high local taxes (like Alabama and Louisiana) can end up with higher combined rates than states with higher state rates.

What Items Are Exempt From Sales Tax?

This is where sales tax gets particularly complex. Each state makes its own rules about which items are exempt from sales tax. The most common exemptions involve groceries, clothing, and prescription medications.

Groceries

• Most states exempt groceries from sales tax, but the definition of “groceries” varies. Generally, unprepared food items (bread, milk, produce, meat) are exempt.
• States that fully tax groceries: Alabama, Mississippi, South Dakota, and Kansas (though Kansas is phasing this out).
• States with reduced rates on groceries: Some states tax groceries at a lower rate than general merchandise. Arkansas taxes groceries at 0.125% while the general rate is 6.5%.
• Prepared food (restaurant meals, deli items, hot food) is almost always taxable, even in states that exempt groceries.

Clothing

• Fully exempt in some states: Pennsylvania, New Jersey, and Minnesota exempt most clothing from sales tax.
• Partially exempt: New York exempts clothing items under $110 per item.
• Most states tax clothing at the full sales tax rate.

Prescription Medications

Nearly every state exempts prescription drugs from sales tax. Over-the-counter medications are more commonly taxed, though some states exempt them as well.

Other Common Exemptions

• Medical devices and equipment: Exempt in most states
• Digital goods (e-books, streaming services, software): Rules vary widely; many states have been updating laws to include these
• Manufacturing equipment: Often exempt when used in production
• Trade-in value on vehicles: Many states only charge sales tax on the difference between the new vehicle price and the trade-in value

Sales Tax on Online Purchases

Before the 2018 Supreme Court decision in South Dakota v. Wayfair, online retailers only had to collect sales tax in states where they had a physical presence (a “nexus”). That ruling changed everything.

Now, states can require online sellers to collect sales tax if they meet certain economic thresholds (typically $100,000 in sales or 200 transactions in the state). This means you’ll pay sales tax on most online purchases, just as you would in a physical store.

Marketplace Facilitator Laws

Most states have also enacted marketplace facilitator laws that require platforms like Amazon, eBay, and Etsy to collect and remit sales tax on behalf of third-party sellers. This means even small sellers on these platforms automatically have sales tax collected.

Use Tax: The Tax You’re Supposed to Pay

If you buy something from a state with no sales tax (or a lower rate) and bring it into your home state, you technically owe use tax — the difference between what you paid and what your state would have charged.

In practice, use tax on small purchases is rarely enforced for individuals. However, for large purchases like vehicles, boats, or expensive equipment, states do track and enforce use tax requirements.

How Sales Tax Affects Your Budget

Sales tax might seem small on individual purchases, but it adds up significantly over a year and is a key factor in cost of living comparisons by state. Consider a household spending $40,000 annually on taxable goods and services:

• In a 0% sales tax state: $0 in sales tax
• In a 5% sales tax area: $2,000 per year
• In a 9.5% sales tax area: $3,800 per year

That’s a $3,800 difference that gets no deduction or credit on your federal return (unless you itemize and elect to deduct state and local sales taxes instead of state income taxes).

Sales Tax Holidays

Many states offer annual sales tax holidays — typically a weekend or week where certain purchases are exempt from sales tax. These often coincide with back-to-school shopping in July or August and may exempt:

• Clothing under a certain price (commonly $100 per item)
• School supplies
• Computers and electronics (in some states)
• Emergency preparation supplies (before hurricane season in some southern states)

States that regularly offer sales tax holidays include Texas, Florida, Ohio, and Virginia. Check your state’s department of revenue for specific dates and eligible items.

Calculate Sales Tax for Your Location

Sales tax rates vary not just by state but by city and county. Use our Sales Tax Calculator to find the exact combined rate for your location and calculate the tax on any purchase amount.

Key Takeaways

• Sales tax has both a state and local component — your combined rate depends on where you shop
• 5 states have no state sales tax; combined rates range up to 10%+ in some cities
• Exemptions vary by state — groceries, clothing, and medications may or may not be taxed
• Online purchases are now subject to sales tax in most cases after the 2018 Wayfair decision
• Sales tax is regressive — it takes a larger percentage of income from lower-earning households
• Sales tax holidays can save you money on specific purchases if you time them right
• Use our Sales Tax Calculator to find your exact combined rate